November 18, 2010

 

China, India propel global dairy market into new era

 

 

Rising consumption power in China and India has pushed the global dairy market into a new era, with both countries set to support prices at higher levels, according to Rabobank.

 

While the global dairy market has been highly volatile in recent years, it is evident structural shifts have taken place to push global dairy prices into a higher average trading range, Tim Hunt, a senior analyst at the bank, said in a statement.

 

Demand from China and India, which account for more than a third of the world's population, have been the engine for global dairy growth in recent years, according to a report prepared by Hunt entitled, "Global Dairy Outlook - Enter the Giants."

 

While accounting for only a small percentage of global milk output, Australian and New Zealand exports represent 10% and 35% of global trade in dairy products, respectively. The EU accounts for 32% of global trade in dairy products, the US 7%, Argentina 4% and Brazil 2%, according to the Australian Dairy Corp.

 

As demand for dairy products is discretionary, the sector can be seen as a litmus test for economic health.

 

Hunt said dairy production in China and India has matched demand over most of the past decade, but pressures from rising animal feed costs, the challenge of building safe supply chains and the volume of sustained growth required make achieving self-sufficiency a Herculean task.

 

"In the wake of the melamine crisis, we now believe that China faces a structural market deficit that will be difficult to erode in coming years, and even India is likely to call on the world market more frequently over the next three to four years," he said. "China and India's presence broaden our medium-term story as another source of demand has arisen for internationally-traded dairy products, and that demand will be difficult to fill without a sustained period of high prices to encourage more milk contributions from higher-cost regions."

 

In 2008, more than 20 Chinese milk producers implicated in a scandal in which the industrial chemical melamine that causes kidney stones was added to milk powder, killing at least six children and sickening 300,000 others.

 

Dairy processors will find the opportunities presented by the rise of China and India difficult to ignore, both in terms of domestic growth and expanding trade requirements, Hunt said.

 

"India is likely to present, at worst, sporadic but also significant trade opportunities, and at best ongoing export business," he said.

 

While these factors will likely sustain global dairy prices at higher levels, buyers' willingness to pay ultimately limits price upside, he said.

 

Dairy producers will need ongoing adjustments to a new operating environment characterised by higher milk prices, higher input costs, and more volatility in both, making margin management a difficult task, he said.

 

Rabobank anticipates the global dairy market will remain tight in 2011.

 

With higher feed costs, ongoing requirements for farmers to cut debt and the likelihood of limited Southern Hemisphere production growth beyond New Zealand, the current phase of supply growth may well prove to be relatively weak and short-lived, Hunt said.

 

Global dairy consumption is expected to strengthen, supported by slowly improving labour markets in the West, strong economic growth in import regions, and strong buying from China, Russia and potentially India, he said.

 

That said, downside risks to prices exist, the bank reported, citing a possible larger-than-expected overshoot in US milk production, already expanding much faster than domestic market requirements.